Russia’s key rate rises by another 50 basis points

The Bank of Russia announced a new increase in its key interest rate to 5,5% on Friday. The decision was largely predictable, although some analysts expected a series of smaller increases as an alternative.

Russia’s Central Bank has raised its key interest rate by 50 basis points, reports the Financial Times adding that the regulator forecasts more increases to come. As a result of the third consecutive rise since March, Russia’s reference rate has reached 5,5%. At a press conference following the decision, the bank’s head Elvira Nabiullina said that the regulator had even considered raising rates by 1% in a bid to combat sharp rises in food prices. She named inflation a growing concern and noted that there was a high probability of another rate hike in July.

“Our main goal is to bring the pace of price rises under control as quickly as possible,” Nabiullina said adding that inflation would probably only start to decline in the autumn. “All factors combined, including stimulating monetary and fiscal policy in large economies, increase the risk that the acceleration of inflation, not only in our country but also in most other countries, is of a more sustained nature than it seemed at first glance,” she explained. Thus, the regulator expects annual inflation to return to its target of 4% in the second half of 2022 and then remain close to this figure further on.

At the beginning of June, President Vladimir Putin called inflation one of Russia’s “two most urgent problems” alongside a rise in unemployment since the COVID-19 pandemic began. In May, annual consumer inflation in Russia surged to 6%, which was the highest level since October 2016, driven by the relaxation of COVID-19 restrictions and a sharp rise in global food and commodity prices. Although the country’s economy is recovering from the pandemic faster than expected, rising prices (particularly for food) remain a significant problem for the government. To protect vulnerable segments of the population, Russia has imposed price caps on a number of key household goods. According to Russia’s Minister of Economy, Moscow is also considering new export quotas or additional duties on food products if global prices continue to rise.

Head of Russia Economics at Citigroup Ivan Tchakarov considers that a series of smaller 25bp rate hikes would be a viable alternative to the Central Bank’s decision, “but the totality of [the bank’s] hawkish message and evident underlying inflationary pressures make larger moves likely”. The rate hike has had little impact on the ruble, which is currently at an 11-month high against the dollar. The Russian currency has added 8% since mid-April fuelled by expectations of higher rates and stronger oil prices.

By Anna Litvina
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